Hedge funds fail to wow in first half

BOSTON, July 5 Thu Jul 5, 2012 2:36pm EDT

BOSTON, July 5 (Reuters) - Hedge funds have little to brag about halfway through 2012, with some of the biggest names reporting only small returns and trailing the benchmark U.S. stock index.

Paul Tudor Jones' flagship fund is up 1.59 percent through the third week in June, David Einhorn's biggest portfolio is up 3.7 percent in the first half, while Daniel Loeb told investors that his largest fund rose 3.9 percent during the first six months of 2012, investors in their funds said.

Compared with a year ago when many hedge funds were losing money, these returns might sound like something to cheer, especially since they beat the benchmark HFRX Global Index's 1.22 percent gain.

But they pale measured against the 8 percent rise in the Standard & Poor's 500 stock index during the first half, with the $2.1 trillion industry failing to wow at a time that public pension funds are increasingly turning to hedge funds to shore up ailing returns.

The industry's underperformance may again raise questions whether it makes sense for institutional investors to pay hefty fees to managers when they can get better returns by buying shares of low-cost index funds. Unlike most other portfolios, hedge funds take a management fee plus a performance fee that is often 20 percent or more.

Europe's seemingly endless debt crisis is getting much of the blame for the year's anemic returns, but fears about U.S. growth and how China will perform are also making for uncertain trading conditions, experts said.

"People are over-managing their positions," said Peter Rup, chief executive and chief investment officer at Artemis Wealth Advisors, explaining that funds moved to short positions only to see those turn against them when markets rebounded after having tumbled.

There are some bright spots, with some managers who specialize in selecting stocks making savvy picks and some managers specializing in credit also performing well.

Leon Cooperman's Omega Advisors Inc was up 10 percent in the first half, benefiting from its long-time investment in student lender Sallie Mae, whose shares have rebounded recently.

Marcato Capital Management, founded by Mick McGuire after he left Bill Ackman's Pershing Square Capital Management, jumped 12.7 percent in the first half.

Andor Capital Management, run by technology investor Dan Benton, who recently came out of retirement, is up 6 percent, while Steven Cohen's SAC Capital Advisors, one of the industry's most closely watched funds, was up 5.2 percent in the first half.

Boaz Weinstein's Saba Capital, which took the other side of some of the trades that resulted in huge losses for J.P. Morgan, was up 2.3 percent through the third week of June. Blue Mountain, another fund that also made money on the other side of J.P. Morgan's failed trades, was up 9.54 percent through the third week of June, a person familiar with the numbers said.

And among the funds managed by men who commanded the biggest salaries in the industry only a few years ago, Kenneth Griffin's Citadel notched a 9 percent increase in the first half.

There are losers as well, including the two men who made the most off betting against the subprime mortgage market. Philip Falcone, now being sued by financial regulators and often slow in releasing his numbers, told investors his Harbinger II fund was off 33 percent during the first five months of 2012. John Paulson's Advantage Plus fund was off 10 percent through the first five months of the year.

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